Ed Balls will only be a problem if George Osborne can’t fix the economy

A sense of proportion is a necessary quality for any politician, let alone a chancellor of the Exchequer. When Geoffrey Howe held the office he was routinely dismissed as a deluded ideologue, and worse, by the press and his colleagues. After his landmark deflationary Budget in 1981, 364 economists wrote a letter to The Times, complaining that his policies had “no basis in economic theory”. One signatory was Mervyn King, who these days is having to write letters to the Chancellor explaining why he has failed to keep inflation in check. Howe pressed on, and is now remembered as one of the Treasury’s great reformers.

George Osborne has a long way to go before he can be considered for membership of that club. In fact, to invite the comparison is to expose the gap between the daring of what Mrs Thatcher’s first administration achieved between 1979 and 1983 and the caution of what the Coalition is trying to do with the economy now. The challenges then were greater; the Conservative responses were bolder. If only, they whisper on the Tory benches, if only…

The lessons of Mrs Thatcher’s first term are being studied closely in Downing Street. Those around David Cameron looking for reassurance amid the shellfire tell themselves that it was far worse then. If she could hold her nerve in that titanic struggle, the Coalition should take heart. Jacob Rees-Mogg, who embodies the Spirit of ’79 in the new Tory intake, got the biggest Commons cheer yesterday when he recalled the Iron Lady and told Mr Cameron: “When we have set an economic course, we should stick to it. There is no alternative.”

So far, only Labour is calling for an alternative. Tuesday’s depressed and depressing growth figures were received with a shrug of indifference elsewhere, not least in the Treasury. Awkward? Certainly: the 0.5 per cent contraction in GDP in the last quarter of 2010 was worse than Mr Osborne had anticipated. His repeated mentions of the cold winter could not disguise that even if we had been blessed with the balmiest Christmas on record, there was no growth to speak of. This quarter is bound to be better.

TINA dominates all, however. There is no alternative. When Mr Osborne says there is no Plan B, he isn’t kidding. If his deficit reduction plan flops, and he has to reverse spending cuts and put up taxes and we still end up like Japan or Ireland, broke, mired in debt and with a comatose economy, then he’s finished. He’ll be gone before the voters can push the eject button. They joke about Winston Churchill being asked for a Plan B after Tobruk, but the insouciance being displayed by the Treasury is only part of the political game. They know this is deadly serious.

Enter the new shadow chancellor. The Treasury operation is recalibrating its weapons to cope with the threat. Dossiers of evidence are being dusted down, attack lines are being redrafted. His record is being plundered for evidence. They are relishing having an obvious enemy. Ed Balls is just the challenge Mr Osborne needed, his allies say. The Chancellor will have to raise his game – and about time, too.

Where Mr Johnson was elusive, a will o’ the wisp politician who travelled light intellectually, Mr Balls arrives in the job ready-made. His history before the election is a millstone around the Labour leadership’s neck. At every stage, he was implicated in the decisions that led to the country’s financial collapse. He drafted the fiscal rules that were rigged to conceal Gordon Brown’s profligacy. He drew up the banking regulations that allowed the City casino to flirt with destruction. All polls suggest that the public see him as irretrievably associated with the failures of the last regime. What he has said since last May is no less toxic to his chances of rebuilding his reputation. The Bloomberg speech he delivered last summer – widely admired as the most pungent of the Labour leadership contest – identified him as a deficit denier who would rather public spending kept on rising along with taxes.

Interestingly, when presented with the open goal of the GDP figures yesterday, he was the one under more pressure in interviews, as he tried to explain whether he did indeed back the Labour deficit reduction plan as drawn up by Alistair Darling and endorsed, eventually, by Ed Miliband.

The Chancellor now has something clear to define himself against. But just because Mr Balls is wrong does not guarantee that Mr Osborne is right. As the recovery stalls, and inflation continues to climb, there are plenty wondering why he has not taken a bigger axe to public spending, which continues to rise, or why he has not produced the tax cuts they say are the only sure fire way of stimulating growth. Mr Osborne, never personally popular among his colleagues, is vulnerable to the kind of changes in the weather he kept talking about on Tuesday. When things get choppy, there won’t be many Tory MPs to come to his aid. No one wants him to change course, but they are muttering about it nevertheless.

Ministers are being urged to seize every opportunity to hammer home the point that the mess is Labour-made. If they are under pressure politically in their departments, it is because of the cuts necessary to repair the damage done by Ed Balls and Ed Miliband when they worked for Gordon Brown – the “two henchmen”, Mr Cameron called them, as they sat uneasily side by side on the Opposition front bench, the shadow chancellor in his implausible lavender tie trying and failing not to look like the senior partner.

For the Chancellor, the politics were always simple: make sure Labour is held responsible, and be unambiguous about the huge task it is to clear up the mess. Having Ed Balls across the dispatch box makes that a whole lot easier.

“The people have had enough,” the shadow chancellor told the BBC on Tuesday, only for Treasury minister Justine Greening to shoot back: “Yes, that’s why they got rid of you.”

In Davos tomorrow Mr Osborne will address the forceful critique set out by Sir Richard Lambert in his last week as head of the CBI. Growth? Yes, he will say, but for that the deficit must be dealt with. Ministers complain that critics do not recognise that every aspect of Government activity has growth in mind: improving education, getting people off welfare, slashing the unproductive public sector, liberalising planning laws, in addition to cuts in corporation tax and reducing regulation. The aim now is to produce a Budget for growth in March that will make up for the embarrassment of the growth Green Paper that never was.

Mr Osborne has shown steadiness under fire before. We know he is good at the politics, and will rise to the challenge of Mr Balls. But demolishing Labour on the economy is hardly the black run at Klosters. That’s the easy bit. And so is talking about growth. Like Geoffrey Howe, the Chancellor will be judged by his actions, and whether he has got the economics right.